Fraud Report 2009
Recent cases
• Madoff - $54bn (£38bn)
• Allen Stanford - $8bn (£5.6bn)
• Kazutsugi Nami, Japanese Ponzi scheme
$2.5bn (£1.76bn)
• US Ponzi schemes
– Nadel $300m
– Schrenker
– “Chicago suburban businessman ... Tens of millions
of dollars”
• Satyam $1bn
• Langbar £365m
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Closer to home – BBC News Feb 2009
• “Charity manager jailed for fraud” - £500,000
• “Arrests over £3m mortgage fraud”
• “Fraud police arrest city trader” – investment
fraud running into millions of pounds
• “Man steals from firm to buy toys” - £780,000
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White collar crime theories
• Interactionist theory
– Sutherland’s theory of Differential Association
• Self control theory
– Gottfredson and Hirschi's (1990)
• Rational choice theory
• Origins of Motivation
• Culture of competition
– Coleman (1987)
• American dream theory
– Choo and Tan (2007)
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Opportunity
•Cressey’s Fraud
Triangle helps
explain the human
process for
committing fraud
Fraud
Triangle
Motivation
Rationalisation
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Fraud Triangle – Motivation/Pressure
– Compulsive behaviours
• Gambling, alcohol, illegal drug use
– Financial debts
• Credit cards, loans
– Family problems
• Divorce, problems with children
– Work pressures
• High targets
– Greed
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Fraud Triangle - Opportunity
• Opportunity is the perception by someone
believing they can commit a fraud without getting
caught.
• Management controls and influences
“opportunity” more than any other factor in the
Fraud Triangle.
• Management tools are employment checks,
internal controls, internal audits.
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Fraud Triangle - Rationalisation
• Justification for fraud:
–
–
–
–
“They owe me” or “I earned it”
“I need it more than they do”
“It’s only fair”
“I am only borrowing it”
• Rationalisation is a form of denial. The person
is not accepting reality.
• Rationalisation is the hardest area for
management to influence or control.
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International Survey precedents
• KPMG (2007)
–
–
–
–
–
70% of fraudsters were between ages of 36 and 55
85% were male
67% acted within 1 to 5 years
68% acted alone
Detected by:
• Whistle blowing 25%
• Management review/internal control 31%
KPMG (2007) Profile of a Fraudster Survey 2007
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International Survey precedents
• Bussman and Werle (2006)
– 41% were aged between 31 and 40
– 87% were male
– Detected by:
• Tip off 29%
• Internal audit 25%
Bussman, K.D. And Werle, M.M. (2006) Addressing Crime in
Companies, British Journal of Criminology, 46, 1128-1144.
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Background
• There were 69 respondent organisations
• Survey focused on assessing the level of
employee fraud, and
• Evaluating the basic control procedures in
place to reduce the risk of fraud occurring
• Almost one-third of respondents had
discovered a fraud in the last 2 years
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Sample profile
• 57% were service companies and most were
private limited companies
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• 40 per cent had no fraud prevention measures
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• Two thirds of
organisations
perceive
fraud as a
risk to their
industry
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• 31 per cent only regard prevention as “slightly
important”
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• 43 percent internal controls and audit
• 29% tip-offs
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Costs of fraud
• BDO Stoy Hayward Fraud Track team noted
that in 2008 reported fraud in the UK was up
14 per cent on the previous year
• Actual fraud in the UK much higher, the Home
Office estimate for cost in 2003/04 was £16bn
• Survey fraud cases showed a wide range of
fraud types from cash skimming to financial
statement fraud and asset misappropriation
• Average value £74k range £500 to £1m
• Average total cost was £435k with a high of
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£4m
Costs of fraud
• Other studies show that up to 50 percent of a
business’ sales can be taken in the worst
cases
• Less than 20 per cent of defrauded sums is
recovered
• In this study only 36% of the cases were
reported to the police
• Concern over organisational reputation given
as the main reason
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• Average age of 37 with less than 5 years
service
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100%
90%
86 percent
male
80%
70%
60%
50%
40%
30%
20%
10%
0%
Male
Female
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Risk Management Measures
• 60 per cent have a standard risk management
policy in place
• 66 per cent have pre-employment screening
• 62 per cent conduct regular risk and threat
assessments
• Only 30 per cent have implemented a fraud
awareness programme
• 34 per cent have any educational programme
on fraud
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Risk Management Measures
• The ACFE study in the USA found:
– In companies with specific fraud training, median
levels of fraud were reduced by 52 per cent
– Companies who had instituted an anti fraud policy
showed a 49 per cent reduction
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Survey key findings
• Two thirds of businesses perceive fraud to be
a risk in their industry
• Less than one third have a fraud awareness
programme or any educational programme
relating to the threat of fraud
• Nearly 70 per cent believe fraud will increase
in the near term mainly as a result of the
economic downturn
• 40 per cent do not have fraud prevention
measures in place
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Survey key findings
• Almost one third of organisations had
discovered a fraud in the last two years
• Discovery mainly through internal audit and
tip-offs
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Contact details
• Richard Trafford
 023 92 84 4121
 richard.trafford@port.ac.uk
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Questions ?
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